Confidence or over-optimism?

The latest consumer and business confidence figures in Australia might be heading north, but elsewhere in the world it’s another matter.

Confidence or over-optimism?

The signs all look good. The latest report from Morgan Research shows very small changes in consumer confidence.

Expectations of good economic conditions in Australia over the coming year are down only 1% while expectations of bad economic conditions over the coming year are unchanged at 19%.

A total of 54% (up 2%) of Australians consider now a good time to buy major household items; just 16% (down 1%) say it is a bad time.

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But small business would be wise to assume the assumptions that the sharemarket boom and the strong economy will hold up after the flood of money that has been pumped into the economy by the federal and state governments over the past year.

Early warning signs overseas are growing. Now the “foreign phenomenon” and the mining boom may well continue for another year but that is no guarantee that overseas markets will continue to buy services and experiences at the same time as they buy from the quarry/farm economy.

Take the nationwide University of Michigan report looking at consumer sentiment across the US. That has slid to 88.3 for the month of May, a decline from 91.3 in February. The last downward tick came in July 2005 when gasoline prices pushed past the $3 a gallon (3.8 litres) and stayed there, Adibi said. At that time, the consumer gauge dropped to a low of 79.

Then there is the sub-mortgage debacle. Thomas McCarthy, co-head of loan sales at Carlton Group, a New York-based real estate investment-banking firm, recently described hedge funds’ holdings of distressed and sub-prime mortgages as a “bloodbath”.

“We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stockmarket and corporate profit.”

In Japan, business confidence hit a five-month high in June, a sign that manufacturing is driving economic growth, according to the Reuters Tankan survey. Japan’s major firms are more confident now than they were in May, helped by overall global economic growth and the weaker yen, boosting exporting firms. However, non-manufacturers’ confidence, including services, fell for the second consecutive month suggesting that the gap between consumer expectations and business confidence may be growing

And this picture is supported by news from Germany, where business confidence has falled further than economists had expected after higher oil prices and borrowing costs raised concerns that economic growth may slow from the fastest pace in six years.

German investor confidence fell in the month of June as businesses viewed the current economic situation in the largest Euro zone economy less favourably, results of a key survey indicated Friday. Going forward, surveyed firms revealed less optimism in their economic expectations for the coming six months. Nonetheless, the survey noted that the business climate in Germany remains at a high level and continues to indicate brisk economic activity.

In Australia, affluent consumers continue to spend as if there is no tomorrow, in contrast to lower-income households, which are already showing signs of “sticker shock” (baulking at higher prices) and worrying about mortgages and the capacity to meet any new interest rate rise.

Although there are plenty of analysts who predict the good times will keep rolling, smart small businesses will keep on the look out for warning signs like these.

(For a more detailed breakdown of who is up and who is down in the expectations of different segments of the Australian and New Zealand consumer markets contact Dr Jane Shelton at marshallplace.com.au.)